Tax Policy

Congress should pass legislation that restores the original intent of
the Tax Cuts and Jobs Act, and allows businesses to recover investments
in Qualified Improvement Property over a period that reflects the true
economic life of the asset. Restoring the preferential tax treatment
of incentives offered by public entities ensures that local investment
dollars are fully leveraged, and that these funds are appropriately
directed towards much-needed development projects.

Issue

Qualified Improvement Property is defined as any improvement to an interior portion of a nonresidential building, excluding an elevator or escalator, changes to the internal structural framework, or enlargement of the building. QIP includes leasehold and tenant improvements.

These improvements to commercial office and industrial properties, restaurants, retail, and other leasehold spaces are often the largest investments made by firms with real property holdings, after the land and building themselves.

Congress intended to make permanent shorter depreciation periods for QIP, which would reduce the after-tax cost of these improvements, provide added certainty and predictability to encourage long-term investment, and foster job growth and economic opportunity in the real estate, construction and other industries.

Because of a drafting error in tax legislation, businesses are now required to write off the cost of these expenditures over a much longer time period, leading to a considerable increase in the after-tax cost of making improvements.

The mistake is most accurately characterized as a clerical error, rather than the result of a misguided policy. It has been identified by the Joint Committee on Taxation as one of only three provisions in the bill that require a true technical correction in order to have the statute reflect legislative intent.

The U.S. Treasury Department has stated that the issue cannot be remedied through regulation or Internal Revenue guidance, but requires a statutory change. Consequently, Congress should pass technical corrections legislation early in 2019 to address the error and enable businesses to go forward with investment decisions.

Status

NAIOP is working with a broad coalition of real estate, manufacturing, retail, restaurant, and other organizations to encourage Congress to pass technical corrections legislation remedying the Qualified Improvement Property depreciation period error.

Economic incentives offered by state
and local public entities are critical for
the success of redevelopment projects
in underserved communities. Previously,
deferral of tax for these “nonshareholder
contributions” were enshrined in the tax
code.

A change in tax law now requires upfront
taxation of such incentives, reducing
their value and increasing development
costs. Bipartisan legislation in the
Senate (S. 2942) would reverse this
change and enable state and local
governments to maximize incentive
dollars.

TalkingPoints

Qualified Improvement Property (QIP) includes modifications to the
interior of a building, such as leasehold improvements.

The 2017 Tax Cuts and Jobs Act (TCJA) sought to make permanent
shorter depreciation periods for QIP to reduce the after-tax cost of
these improvements, encourage long-term investment, and foster job
growth and economic opportunity.

A drafting error in TCJA requires businesses to recover these costs
over a much longer period of time than intended, sometimes over four
decades. Firms are delaying or even cancelling renovation projects,
disrupting development in retail, restaurant and manufacturing.

Public entities at the state and local levels have long used incentives
as a means of spurring economic development, particularly in
underserved communities. Grants, contributions of land, and other
incentives often determine whether or not a development is viable.

Though previously treated as tax-free contributions to capital under
Section 118 of the tax code, these incentives are now taxed up front,
reducing their value and forcing local governments to make up the
difference.

NAIOP supports bipartisan legislation (S. 2942) that would restore
the prior tax treatment of these incentives and ensure that local
investment dollars are maximized and directed towards much-needed
development projects.
naiop